A floating charge agreement is a legal document that allows a lender to secure a loan against a company`s assets that may change over time. This type of agreement is commonly used in business financing and can provide a flexible and effective way to access capital.
When a floating charge agreement is put in place, the lender will have a claim on any assets of the company that are not already secured by a fixed charge. This could include inventory, machinery, or accounts receivable, for example. The important thing to note is that these assets can change over time, so the lender`s claim is said to `float` over them.
For the company, this type of agreement can be beneficial as it allows them to continue to use their assets without restriction. It also means the lender`s claim is less expensive to set up than a fixed charge as there is no need to identify and register specific assets. However, the company should be aware that if they default on the loan, the lender will have the right to take possession of their assets, which could include things like inventory or equipment that are vital to the business.
A floating charge agreement is often used in combination with other types of financing, such as a term loan. This allows the company to access capital quickly and easily, while still retaining control over their assets. It is important to note that not all lenders will offer floating charge agreements, as they can carry more risk than other types of financing.
When entering into a floating charge agreement, it is important for both the lender and the company to carefully consider the terms and conditions. The agreement should clearly outline the assets covered by the floating charge, the circumstances under which the lender can take possession of them, and any fees or penalties for default.
In conclusion, a floating charge agreement can provide a flexible and effective way for companies to access financing while still retaining control over their assets. However, it is important to carefully consider the terms and conditions and understand the risks involved before entering into such an agreement.